PT. Gudang Garam Tbk (Ist)

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INDUSTRY.co.id - Jakarta - Although signs of economic recovery have started to appear since the second semester of last year, the impact has not positively affected the cigarette industry. Some data showed cigarette sales throughout January fell compared to last year. Although this figure cannot be reflection for the whole of this year.

Based on data collected by PT Bahana Sekuritas, industrial cigarette sales volume fell by 7% to 23.1 billion cigarettes by the end of January compared to the same period last year. In accordance with Bahana estimates, the smaller cigarette producers experienced a larger volume of decreases such as Djarum's sales dropped by 11.7%, Norojono fell by 19.6%, while Gudang Garam's sales volume decreased by 4.8% and Sampoerna decreased by 3, 7%.

"This decline is only a month, so it is still too early to be a reflection of the whole year, we will still be waiting for other supporting data," said Bahana analyst Michael Setjoadi. If in the coming months the sales volume remains in the range of 23%, industrial sales volume in the second quarter will fall about 2% on an annual basis, said Michael.

The drop in sales is due to higher cigarette prices made by tobacco manufacturers to cover the 10.04% rise in cigarette excise tax imposed by the government since January 1, 2018. Bahana estimates tier 1 cigarette producers, raising the average selling price of cigarettes by about 5 % - 5.5%

PT HM Sampoerna raised average cigarette prices by 7% annually in the first quarter of this year, while PT Gudang Garam was more conservative in raising the average selling price by 4.3% profit of the company.

The state-owned securities estimates Sampoerna's revenue in the first quarter will rise by about 3.8% on an annual basis, with projected net profit growth of 1.3% to Rp 3.33 trillion. While Gudang Garam, although it is estimated to pocket a revenue increase of 2.4% in the first quarter of 2018 compared to the same period last year, net profit is expected to decrease by 13.3% to Rp 1.64 trillion.

Given the declining sales volume for the long term due to the rise in cigarette taxes, Bahana still maintains Neutral recommendations on tobacco stocks. For the medium term, Bahana prefers Gudang Garam (GGRM) stocks with a target price of Rp 92,000 / sheet while a stand-alone recommendation for Sampoerna shares (HMSP) with a target price of Rp 4,600 / sheet.

If it turns out the sales volume of the cigarette industry during 2018 is estimated to decrease by 7% compared to last year, Bahana projects HMSP revenues will drop about 4.6% to Rp 101.22 trillion from the original estimate of Rp 106.07 trillion for 2018, net fell about 7% to Rp12.77 trillion from its original forecast for 2018 of Rp 13.75 trillion.

GGRM revenues are expected to fall by 4.5% to Rp87.79 trillion from the original estimate of Rp 91.96 trillion, with an estimated net profit to be eroded by 18.5% to Rp 6.84 trillion from its original estimate of Rp8.88 in 2018, 39 trillion.

In the end, it will affect the decrease of HMSP price target to Rp 3,900 / share, and target price of GGRM to Rp 62,200 / share.